The state's economic forecast worsened considerably Wednesday, with the Malloy administration confirming a $365 million budget deficit and a Hartford financial research firm declaring that Connecticut has the worst credit quality in the nation.

By law, a deficit of this size will force the Malloy administration to propose cuts in state programs. Appearing before the General Assembly's appropriations committee Wednesday afternoon, Office of Policy and Management Secretary Ben Barnes blamed the shortfall on lower tax revenues and more people than expected requiring services under Medicaid, the federal program that provides health care for the poor.

Gov. Dannel P. Malloy has ruled out any tax increases in 2013. Barnes told legislators they are preparing a budget-cutting plan to respond to the unexpected cost overruns. He would not elaborate but said, "I don't intend to drag this out, but I do need a few more weeks."

The double dose of bad news was a fresh reminder of the fragile state of Connecticut's economic recovery. The credit report by Hartford-based asset manager Conning Inc. also represents a grim warning to investors considering purchasing state-issued bonds.

"The reality is quite alarming," said Conning's Paul Mansour, the report's author. "The state is among the worst in job creation [and] tax revenue growth and has not yet seen a recovery in home prices. It has very high debt and retirement obligations, little budget flexibility and no rainy day fund balance."

Wednesday's alarming deficit news offered further confirmation.

State Comptroller Kevin Lembo said the shortfall shows that there are basic fundamentals in the state budget that aren't working – such as how much tax revenue is expected. He said all state programs, especially those added in the past five years, must be assessed.

"If we downplay the numbers, it would be a significant strategic mistake," said Lembo, who did not attend Wednesday's legislative hearing. "It's a sobering time for everyone."

In a letter to Malloy this month, Lembo noted Connecticut's poor job creation record of the past year when it added a "scant 1,900 jobs" and a state unemployment rate of 8.9 percent in September.

Under state law, Malloy is required to submit a cost-cutting plan to the legislature if the deficit projection is greater than 1 percent of the state's $19.1 billion general fund. The projected deficit of $365 million is nearly twice that amount.

Barnes said Malloy does have limitations when it comes to where he can cut spending. For example, he said the governor can't cut municipal aid and can't cut more than 5 percent of any budget line.

"The legislature could act to reduce spending with a much bigger hand," Barnes added.

Appropriations committee co-chairwoman Toni Walker, D-New Haven, said no one should jump to conclusions regarding what might be cut. "I don't want to speculate," Walker said.

Barnes said a large part of the deficit is a result of growth in Medicaid. program. The Malloy administration is assuming that Medicaid expenditures, half of which are reimbursed by the federal government, will continue to grow.

Barnes attributed the $260 million shortfall in Medicaid to increased use of hospital services and an increase in caseloads in a program for low-income adults. For example, he said the budget assumed the present caseload level of 83,827 clients would not be reached until August 2013.

According to the legislature's Office of Fiscal Analysis, the Medicaid shortfall can also be blamed on "optimistic assumptions" in the budget, as well as the growth in caseloads. The Medicaid program for adults, for example, has surged by 4,000 clients since June, adding $30 million in expenditures.

Department of Social Services Commissioner Roderick Bremby told legislators that his agency, which oversees Medicaid, is doing what he can to cut costs. He said growth in Medicaid pmay ultimately require his agency to spend more on staff and overtime to meet the state's needs.

In addition to Medicaid shortfalls, Barnes said, a decrease in tax revenue is also a reason why the state is facing a large deficit.

During Wednesday's hearing, lawmakers peppered Barnes and Bremby with questions, trying to understand why the state is facing a deficit and what can be done.

Rep. Craig Miner, R-Litchfield, urged Barnes and the state's financial leaders to take control and act early. He said he was worried about the state's financial situation worsening.

"If it does, we're going to be looking at very, very big problems in the state of Connecticut," he said.

Reprinted with permission of the Hartford Courant.
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